Brazil is looking more and more likely to miss its ambitious targets for improving transport infrastructure ahead of the World Cup in 2014. Given the challenges arising from the country's business environment, the number of projects hoped to be moved from the drawing board to realisation was always going to be a challenge . As expected, whilst the crucial stadia will be completed, transport projects are likely to disappoint.
Stressing the sense of urgency in push ing transport projects through the pipeline, the h ead of the EPL, Brazil's state logistics agency, laid out new terms and ' permissible ' profit margins for private operators in transport infrastructure. The flagship project is the Rio de Janeiro - Sao Paolo bullet train, for which the second attempt at a tender is due to take place in September 2013. T he government is looking to entice the private sector into a plethora of concessions for the transport network, which is weak and is undermining the Brazilian economy's competitiveness. The bullet train will now miss both the World Cup and the 2016 Olympics.
Ahead of the World Cup, we initially said there were 51 urban mobility projects in the planning phase and 41 airport projects. As of May 2012, the last comprehensive update available, 45% and 42% of urban mobility and airport projects respectively had yet to commence. Whilst we have seen some progress over the last year, it is clear that some projects will never be realised.
|Rushing To The Finish Line|
|May 2012 Update: Number of Projects At Each Status (And Value of Projects At Each Status, BRLbn - numbers above columns)|
|On The Drawing Board|
|No. of Projects In Planning|
During a presentation at the Reuters Latin America Investment Summit, the head of the EPL said that Brazil needs nearly US$40bn in transport infrastructure investments per year, double current levels. Of that, half is expected to come from the private sector. Revised rules are expected to entice interest. For instance, the internal rate of return for a highway concession was raised to 7.2%, from the previous 5.5%. Railways concessions can have an IRR of between 7% and 7.5%. Freight transport projects appear to be one of the main target s of these changes, though tournaments-related projects will also benefit.
Hangover Likely To Be Mild
In our special report produced in March 2011 we outlined the scenarios for a country's construction sector following the hosting of a big sporting tournament (see BMI's From Athens to Qatar: Sporting Events And The Construction Sector, March 2011). Our conclusion for Brazil was that, given the scale and size of its needs, and its construction industry value, we do not anticipate that growth in the construction industry will decelerate once the tournaments are over; certainly not in the same way it decelerated in South Africa, Greece, Poland or Ukraine.
In the report we noted:
The official budget for the games has yet to be finalised, however, based on initial estimates the government is planning to invest US$14.4bn on hosting the [2016 Olympic] games, which is equal to just 7% of construction industry value, a similar ratio to Canada's investment for the 2010 Winter Olympics in Vancouver, and less than the relevant ratio for China. This implies that minimal impact will be discernible from the hosting of the games. For the 2014 World Cup, the official budget is US$11.7bn. A significant portion of this is for transport investments, around 60%, predominantly urban transport and upgrading airports.
While several projects - not part of the official budget - will also ride the coat-tails of the tournaments and get pushed through, when taking a step back and looking at the bigger picture from a different perspective, such as through the looking glass of the PAC II with a total value of US$526bn, then the impact of the tournaments on construction appears to be much smaller, which is what underpins our argument.
These new measures that the government is taking lend further support to our view that the major freight transport projects on the drawing board (in addition to energy and social infrastructure) will sustain the growth in infrastructure industry value even after the tournaments have finished. While some transport projects will never be realised once the tournament momentum fades, the new measures raises the spectre that long delayed transport projects will just make it over the finish line.